Yellen defends bank regulations

Federal Reserve Chair Janet Yellen talks with Haruhiko Kuroda, head of the Bank of Japan, and Mario Draghi, head of the European Central Bank, during a break at the central bankers conference at Jackson Hole, Wyoming, Friday, on August 25, 2017.

United States Federal Reserve Chair Janet Yellen on Friday emphatically defended the web of regulations the Fed helped enact after the 2008 financial crisis, saying it helped restore the banking system's health and disputing criticism that the rules have hurt lending.

Yellen said the Fed is prepared to adjust the regulations as needed to help financial institutions.

But in a speech to an annual conference of central bankers in Jackson Hole, she implicitly rejected efforts by Republicans, including President Donald Trump, to scrap the 2010 Dodd-Frank law as a threat to the economy.

The Fed chair refrained from remarking on the state of the economy or on the possible future course of interest rates. Investors had been awaiting her speech for any signals about what the Fed might do when it meets next month. The central bank has been gradually raising its benchmark short-term rate, but most Fed watchers expect no rate hike before December at the earliest.

Overhanging Yellen's speech was the possibility that it marks her final appearance in Jackson Hole as Fed chair. Her term as chair will end in February, and Trump has made clear he is considering replacing her. One candidate he has mentioned is Gary Cohn, a former Goldman Sachs senior executive who leads Trump's National Economic Council.

Some saw Yellen's forceful defense on Friday of the regulatory structure imposed on banks since the 2008 crisis as further lessening the likelihood that Trump will reappoint her.

Sal Guatieri, senior economist at BMO Capital Markets, said Yellen's speech "puts her at odds with Trump's deregulation mandate, which could weigh against her remaining as chair when her term expires early next year".

Paul Ashworth, chief US economist at Capital Economics, said, "Yellen's passionate defense of the post-crisis tightening of financial regulation isn't going to go down particularly well at the White House."

A few hours after Yellen's speech on Friday, Mario Draghi, president of the European Central Bank, told the Jackson Hole conference that the global economy is strengthening but warned that countries must work together to resist a growing backlash against open trade. He said multilateral co-operation is crucial to reassuring workers who worry that free trade puts their jobs at risk.

Draghi did not address the financial health of the eurozone, which includes the 19 nations that share the euro currency. Some investors had expected him to send some signal about when the ECB would begin slowing its monthly bond purchases.

In her speech, Yellen noted that the US and global financial systems were "in a dangerous place 10 years ago", with severe strains that led to the collapse of investment bank Lehman Brothers, the government takeover of mortgage giants Fannie Mae and Freddie Mac, and the requirement that taxpayers bail out the largest banks.

The Fed chair pointed out that despite all the government support to banks, the downturn devolved into the Great Recession, with the loss of nine million US jobs and millions of Americans losing homes to foreclosures. She said that the resulting recovery has been painfully slow and that policymakers have had to devise ways to prevent another financial crisis.

Yellen said the Dodd-Frank Act has produced a far safer banking system, especially with banks required to hold much higher levels of capital, the cushion against losses from bad loans.

In addition to higher capital requirements, the Fed chair said the financial system has been fortified by regulations requiring that the biggest banks undergo annual stress tests to ensure that they have enough capital to withstand any future severe downturn.

She said that in all, the tighter regulations, far from stifling economic growth, had actually helped the economy in part by making the financial system safer.

"Our more resilient financial system is better prepared to absorb, rather than amplify, adverse shocks, as has been illustrated during periods of market turbulence in recent years," she said.